Biodiversity liability and value chain risk report

Biodiversity liability and value chain risk report

BIODIVERSITY LIABILITY AND VALUE CHAIN RISK

March 2022

CONT E NT S

04. Executive Summary

08. Accounting for biodiversity loss

18. Value chain risk and biodiversity loss

26. Biodiversity law and regulation

48. Biodiversity liability risk

56. Mitigating biodiversity risk: action plan

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E X E CU T I V E S UMMA RY

What is the problem?

Climate change is just one of the world’s planetary boundaries. Human civilisation also depends on a healthy biosphere – the thin layer of interconnected ecosystems that sustain life on Earth. We depend on biodiversity to pollinate crops for the food we eat, to clean water and air, for many of the products we consume and our physical, mental and spiritual well-being. Nature has been providing these “ecosystem services” free of charge with economic models not properly accounting for nature’s contributions to people, or for the true costs of pollution and environmental degradation. As a result of ignoring the importance of the natural world, we are now facing a biodiversity crisis; current extinction rates are 100 to 1,000 times higher than the baseline rate, and they are increasing. Biodiversity loss threatens human survival; it is the “value chain” on which we all depend. Reflecting the urgency, there is a movement towards integrating biodiversity risk into mainstream economic thinking and financial and corporate planning, similar to the trajectory of climate change risk. Stakeholder interest is growing, with government initiatives now bolstered by financial market pledges such as the Finance for Biodiversity Pledge. Shareholders will soon be scrutinising biodiversity in investee companies and regulators will be looking carefully at the environmental impacts of companies and expecting due diligence on subsidiaries and value chains. Business leaders and boards will face a raft of new responsibilities.

For industry generally we will see new physical, regulatory, market and reputational risks – all of which are compounded by the hyper-connectivity of global value chains. The consequences of not managing these risks will play out in terms of inability to attract finance, do deals and ultimately in damage to market value. For insurers, write-downs and write-offs will lead to business line impacts, increased insurance claims and higher premiums.

At the same time, biodiversity risk is being actively “mainstreamed” into financial markets and corporate decision-making. The taskforce on Nature-related Financial Disclosures (TNFD) is following the playbook set by the Taskforce on Climate-related Financial Disclosures (TCFD) just a few years ago. The final release of the TNFD recommendations is scheduled for 2023 and like TCFD, this will embed biodiversity risk reporting into mainstream corporate reporting standards. Biodiversity is also front and centre in new due diligence frameworks. These laws, pioneered in European jurisdictions including France and Germany, draw inspiration from the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the OECD Due Diligence Guidance for Responsible Supply Chains. The next generation of mandatory Human Rights and Environmental Due Diligence (mHREDD) go beyond mere reporting obligations and create new standards of care for companies to act to mitigate human rights and environmental harms in their value chains through “vigilance” or “prevention action” plans and institute corrective actions where abuses are identified, including by severing business relationships. The most significant and potentially far-reaching development in this area is the advent of mHREDD at the EU level. On 23 February 2022, the EU Commission published its proposed Directive on Corporate Sustainability Due Diligence. The Directive will apply

to companies with substantial turnover in the EU: EUR 150m, or EUR 40m for high-impact sectors like textiles, food production and extractive industries. Like GDPR, there will be an extraterritorial effect, as companies will have the obligation to exercise due diligence over business partners with whom they have an “established busines relationship” in both their direct and indirect value chain. Importantly, the new EU Directive envisages investigatory powers at a national level with the possibility of fines, and requires that implementing Member States establish a liability regime for corporate breaches of the due diligence obligations.

What is the timeline/ when can we expect biodiversity risk to become material?

What are the liability risks?

There is increasing attention to “nature-based solutions” to climate change, and nations are actively seeking to preserve and create natural carbon sinks, such as forests, mangroves, wetlands and peatlands. Biodiversity was a strong focus at COP26, where 141 states agreed to the Glasgow Leaders’ Declaration on Forests and Land Use, supporting the preservation of biodiverse forests as imperative in the fight against climate change. Many countries are also putting in place 30x30 targets for biodiversity – to preserve and protect 30% of land and sea by 2030 – and it is envisaged this will be agreed as an international goal at this year’s Conference of the Parties to the Convention on Biological Diversity (COP15) in Kunming China. States are now thinking beyond a single habitat or species, but in terms of broad, time-limited biodiversity goals, which will have far-reaching impacts for regulation, policy-making, and attendant liability risks to corporates.

Companies in mHREDD jurisdictions will need to understand whether value chain partners’ activities are having an adverse impact on biodiversity, as well as other environmental harms and human rights abuses. Liability risks may arise from due diligence failures. For example, in March 2021 an international coalition of NGOs sued the French supermarket chain Casino for its alleged failure to prevent cattle industry-caused deforestation of the Amazon and Cerrado in Brazil and Colombia and attendant human rights abuses against Indigenous Peoples. Inadequate planning or management around the physical risks of biodiversity loss can impact companies directly reliant on ecosystem services, such as food and agriculture. But it can also harm companies in diverse

Executive Summary

7

What action is needed?

lines of business, as biodiversity risks are embedded in every value chain, including real estate, aviation, and electronics. We need only look at the impact of a zoonotic disease like Covid-19 – a result of diseased wild animal populations coming into closer contact with humans – to appreciate the enormous financial and human risks posed by biodiversity loss. Companies that fail to anticipate the scale of the transition to a sustainable economy will also find themselves exposed to liability risk. Businesses will need to stay nimble and anticipate incoming investor and regulatory pressures, as well as rapidly changing procurement priorities for value chain partners. With increasing understanding of biodiversity loss as a financial risk, companies will increasingly need to understand and report on how their operations impact and are impacted by biodiversity loss. Liability risks may arise from failure to adequately or accurately disclose those risks.

At pages 54 to 55, this report sets out some recommendations to corporates and their officers to take a proactive approach to managing the looming material risk of biodiversity loss, incoming regulation and liability risks. Compared to climate risk, the timeline here is accelerated. We expect wide-ranging value chain due diligence standards of care to be in place in many jurisdictions by 2024. A framework for nature- related disclosures will likely have crystallised in 2023, and ambitious nature conservation targets will be in place, with a ratcheting-up of ambition on nature-based solutions to climate change mitigation and adaptation through the climate COP process, including this year’s COP27 in Sharm El Sheikh Egypt. If they haven’t already done so, forward-looking corporates in every sector need to begin their biodiversity risk journey by:

– understanding incoming regulations and the scope of value chain due diligence that will soon be expected

What developments heighten the risk?

At the same time as due diligence laws create obligations for companies to scrutinise biodiversity loss and other impacts in the value chain, courts in some developed jurisdictions – e.g. the UK, Netherlands and Canada – are increasingly willing to look behind the fiction of “legal personhood” and lift the “corporate veil” to hold parent companies liable for the acts of subsidiaries. As knowledge of biodiversity loss and risk grows, including through nature-related financial disclosures, the standards of care expected of directors and officers, including as to reporting, will rise. There is an increasing ability to account for, monitor and quantify biodiversity loss, including through remote sensing, and >Page 1 Page 2-3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24-25 Page 26-27 Page 28-29 Page 30-31 Page 32-33 Page 34-35 Page 36-37 Page 38-39 Page 40-41 Page 42-43 Page 44-45 Page 46-47 Page 48-49 Page 50-51 Page 52-53 Page 54-55 Page 56-57 Page 58

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